Companies with overseas Permanent Establishments (PE) can offset losses against their UK profits in the year the losses arise and thus reduce their UK tax liabilities. However, those losses may also be used overseas to frank other foreign profits that do not get taxed in the UK at all. As a result, subsequent years’ profits of the PE suffer foreign tax which can be relieved against the UK tax liability arising on those profits, when incorporated into the UK tax computation. This leads to double tax relief in the UK, once as a loss and once as a foreign tax credit.
For accounting periods starting after 22 November 2017 legislation will curtail this advantage by restricting the foreign tax relief to the net amount of the foreign tax suffered on the actual foreign profits after taking account for foreign losses in this or an earlier year which have reduced other foreign income. The effect will be to ensure that only the net cumulative profits of the PE will determine the quantum of foreign tax that is deductible in the UK.
Accounting periods that straddle 22 November 2017 will have transitional rules applied to them.
Going forward UK companies with a foreign PE will only be able to obtain double tax relief for the actual net profits in the PE that would have been taxed if the foreign losses had been set off against those profits. This ensures that the double tax relief is given only on profits that have actually been doubly taxed.